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US CLO Issuance Continues on Record Pace; $99B YTD

US CLO issuanceCLO issuance in the U.S. has totaled $99 billion already this year, easily outpacing the $71 billion at this point one year ago, according to LCD. The CLO market is on pace to top the record $124 billion in 2014.

CLOs are special-purpose vehicles set up to hold and manage pools of leveraged loans.

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European CLO Issuance Continues on Record Pace

Europe CLO issuance

Issuance of collateralized loan obligation vehicles in Europe so far this year, at €20.41 billion, has nearly topped the €20.91 billion seen during all of 2017, according to LCD.

While activity in the segment is expected to roll on, a pair of huge cross-border LBOs to clear market recently – Refinitiv and Akzo Nobel – did cause some consternation for CLO players, as those deals priced at a tighter level than expected, market sources said.

Refinitiv’s $2.75 billion-equivalent euro-denominated term loan priced at E+400, after being initially launched to market at E+425, while a €1.79 billion credit for Akzo eventually priced at E+375 after being first talked at E+425. Pricing on both was cut due to investor demand.

Refinitiv backed Blackstone’s $17 billion acquisition of a Thomson Reuters Financial & Risk unit stake. Akzo backed Carlyle and GIC’s buyout of the company.

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In Test of Market, Refinitiv Wraps Massive LBO Financing; Top Deals All-time

Refinitiv last week closed a $14.25 billion leveraged loan and high yield bond package backing the LBO of Thomson Reuters’ Financial & Risk business by private equity concern Blackstone, successfully testing just how big a deal can get done in today’s red-hot global leveraged finance market.

biggest LBO dealsIndeed, despite its size—Refinitiv is the second-largest LBO financing since the financial crisis—and deal structure that some in market called aggressive, banks arranging the transaction reduced the interest rate on offer to investors during the syndications process, and commitments to the loan portion of the deal topped the $9.25 billion final amount, indicating strong investor demand for leveraged loan assets, both in the U.S. and in Europe.

The high yield bond portion of the financing ended at $4.25 billion after being reduced to compensate for an increase in the loan.

largest financings 1

As well as being the second-largest leveraged buyout since the financial crisis, Refinitiv is the ninth-largest leveraged finance deal of all time, according to LCD. Leveraged finance entails leveraged loans and bonds to speculative grade issuers.

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With Help from Refinitiv, LBO Leveraged Loan Issuance tops 2017 Levels

lbo loan issuance

Big-ticket LBOs are driving the U.S. leveraged loan market in 2018.

So far this year $90 billion of credits backing buyouts have been launched or completed in the syndicated loan market, nearly as much as in all of 2017, according to LCD.

The 2018 LBO loan figure has received a huge boost of late via a spate of jumbo transactions. Chief among them is Refinitiv, which includes $6.5 billion of institutional loan debt backing Blackstone’s $17 billion takeover of Thomson Reuter’s financial data and technology unit (the PE firm is acquiring a 55% stake). The loan portion of the deal was targeted for $5.5 billion, but was increased due to investor demand.

Tellingly, the high yield bond portion of the Refinitiv financing was decreased at the same time, illustrating the clear preference that speculative-grade debt investors have for loans this year, compared to bonds

As is often the case, LBO loans and other M&A deals are in keen demand from institutional investors as these credits generally offer higher pricing and richer returns than do non-M&A credits, because of their increased leverage and often-aggressive terms.

Of course, with the chance for higher returns comes more risk. This is especially the case today, as most credits completed in market now are covenant-lite, meaning they are less restrictive for the issuer, and consequently offer investors and lenders less protection during the life of the loan.

Indeed, of the $90 billion in LBO loans so far this year, $78 billion is cov-lite. This tracks with the overall U.S. leveraged loan asset class, which now totals some $1.1 trillion, according to the S&P/LSTA Index. Roughly 80% of those outstandings are cov-lite. – Staff reports

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Covenant-Lite Share of US Leveraged Loan Market Hits Record 79%

The share of covenant-lite deals in the U.S. leveraged loan market continues to reach new heights. The latest record: As of August, cov-lite accounted for 78.64% of outstanding loans, up from 77.8% in July, according to the S&P/LSTA Loan Index.

This is the 10th straight record. The cov-light share of market has increased steadily from roughly 64% in August 2015.

Cov-lite loans are in some ways structured akin to high yield bonds, in that they feature incurrence covenants, as opposed to the more restrictive maintenance covenants.

With an incurrence covenant a debt issuer would have to meet a specific financial test only if it wanted to undertake a particular action (like borrow money to fund a dividend to a private equity sponsor, for instance). Under a maintenance covenant the issuer would need to meet regular, specific financial tests, even if it did not want to undertake that dividend deal.

Market pros agree that the cov-lite loan structure will hinder recoveries on bank loans, whenever the current credit cycle turns and defaults begin to mount, though the jury is out as to just how much of a hit recoveries will take.

One hint: S&P’s LossStats, and LCD, conducted analysis on recoveries of cov-lite loans that defaulted before the 2008-09 financial crisis, versus those that were structured and defaulted after the crisis. The later-vintage group of cov-lite loans saw an average discounted recovery of 56%, compared to a 78% average recovery on the earlier deals (though the data in the later sample is thin, as there have been few leveraged loan defaults during this cycle). You can read more about this LossStats analysis here. – Staff reports

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Web.com Wraps $1.5B Leveraged Loan Backing LBO by Siris Capital

Web.com Group completed the covenant-lite term loan financing for its buyout via a Morgan Stanley–led arranger group, according to sources. The $1.095 billion first-lien term loan due 2025 (L+375, 0% LIBOR floor) priced at an OID of 99.75, and the $420 million second-lien term loan due 2026 (L+775, 0% floor) came at 99.25. Both priced tight to talk, and the first-lien was increased by $15 million to replace revolver draws. Financing also includes a $100 million, five-year revolver with a springing leverage covenant. Proceeds are being used to finance the take-private buyout of the company by Siris Capital in a roughly $2 billion deal. Web.com Group is a global provider of internet services and online-marketing services for small and midsize businesses. Terms:

Borrower Web.com Group
Issue $1.095 billion first-lien term loan
UoP LBO
Spread L+375
LIBOR floor 0.00%
Price 99.75
Tenor 7-year
YTM 6.25%
Four-year yield 6.31%
Call protection 101 soft call for 6 months
Corporate ratings B/B3
Facility ratings B+/B2
Recovery rating 2
Financial covenants None
Arrangers MS/RBC/Macq
Admin agent MS
Px Talk L+400-425/0%/99-99.5
Sponsor Siris Capital
Notes Upsized by $15 million.
Borrower Web.com Group
Issue $420 million second-lien term loan
UoP LBO
Spread L+775
LIBOR floor 0.00%
Price 99.25
Tenor 8-year
YTM 10.61%
Four-year yield 10.79%
Call protection 102, 101 hard calls
Corporate ratings B/B3
Facility ratings CCC+/Caa2
Recovery rating 6
Financial covenants None
Arrangers MS/RBC/Macq
Admin agent MS
Px Talk L+800-825/0%/98.5-99
Sponsor Siris Capital
Notes

 

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Middle Market: Private Debt Funds Account for Half of European Leveraged Loans

In the U.K., private debt funds racked up a market share of almost 50% of mid-market term loans (those under €300 million in size) in the first half of 2018, according to advisory firm AlixPartners’ bi-annual mid-market debt report. When stretch senior deals were combined with unitranche loans, private debt funds provided 46% of loans in the U.K., the report reveals.

Sources credited the continued increase in debt funds’ market share to the maturity of the U.K. market, as well as the density and openness of sponsors operating there to non-bank lenders.

The total deal count for European debt funds in the first six months of 2018 hit 181, led by Ares (21 deals) and Tikehau (16 deals). That figure was down on the 203 deals racked up in the second half of 2017. On an overall European basis, unitranche deals increased their market share to 31% of all deals recorded, up from 27% in 2017, said the report. That proportion rises to 35% when super-senior and junior facilities are excluded.

Unlike the large-cap syndicated market, which has been dominated by M&A this year, the drivers for mid-market deals have remained extremely stable, according to AlixPartners. The proportion of leveraged buyouts (45%) and refinancings (24%) were the same in 1H18 as they were for full-year 2017. Add-on acquisitions increased marginally from 22% in 2017 to 25%, while dividend recaps fell to 6% in the first half of the year, from 8% in 2017. — Rachel McGovern

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US Leveraged Loans Return 0.40% In September, Trailing Only Equities YTD

us leveraged loan returns

U.S. leveraged loans returned 0.40% in August, down from a respectable 0.74% gain in July, as loan prices in the trading market slid once again, following a temporary reprieve, according to the S&P/LSTA Loan Index.

The relative softness in prices resulted from an increase in net supply of paper on offer to investors as a hefty slug of jumbo M&A credits wrapped up in the syndications market.

So far in 2018 U.S. leveraged loans have returned 3.32%, besting the other asset classes LCD tracks in its monthly analysis, with the exception of equities, which continue to outperform, returning nearly 10% so far this year.

High yield bonds, the asset class most closely associated with leveraged loans, have returned 1.93% so far this year.

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Bankruptcy: Oaktree Objection Hits Claire’s Plan Valuation, Distribution Scheme

Oaktree Capital Management on Sept. 6 objected to confirmation of Claire’s Stores’ reorganization plan, saying that “there are more than 20 material flaws” in the plan, “any one of which standing on its own could be a basis for the denial of confirmation of this plan at this time.”

Further, according to Oaktree, “taken in the aggregate, and viewed collectively as a body of work, these flaws can lead to but one conclusion: the process in these Chapter 11 cases, and the [reorganization] plan it has produced, are so tainted that the … plan cannot now be confirmed.”

As reported, a reorganization plan confirmation hearing is scheduled for Sept. 17.

The objection from Oaktree was expected. Oaktree, which holds nearly 72% of the company’s second-lien debt, has been fighting the company’s proposed reorganization plan tooth and nail since the Chapter 11 filing on March 19 (see “Claire’s 2L notes holder, Oaktree, slams RSA, proposed reorg plan,” LCD News, March 21, 2018).

As reported, prior to filing for Chapter 11 the company entered into a RSA with an ad hoc group of first-lien lenders led by Elliott Associates and Monarch Alternative Capital, as well as with the company’s equity sponsor, Apollo Management.

Among other things, the ad hoc group agreed to backstop a $575 million rights offering to fund the reorganization plan.

Under the proposed plan, first-lien lenders, with claims of about $1.43 billion, would receive 100% of the reorganized company’s equity, along with a deficiency claim—a recovery valued by the company’s disclosure statement at 69.9% (although the actual recovery will be slightly higher, just over 70%, because second-lien lenders voted to reject the plan, and therefore will not participate in the deficiency claim pool, increasing the first lien deficiency claim distribution by about $8 million).

Second-lien lenders—who, as noted, voted to reject the plan—will participate in the cash recovery for general unsecured creditors, a recovery valued at 0.003–0.495% (had second-lien lenders voted in favor of the plan, they would have participated in the deficiency claim recovery with first-lien lenders on a pro rata basis for a cash recovery of 3.5%).

Throughout the case, Oaktree has argued that the $1.4 billion total enterprise valuation upon which the RSA and proposed reorganization plan are based is too low. In late June, Oaktree successfully challenged the company’s limited and truncated initial marketing process, obtaining a court order requiring the company to extend the process through Aug. 31, and opening it to a wider variety of deals than the 100% payout-event plan initially demanded by the company.

Oaktree was expected to submit a bid in connection with that process, but apparently did not do so.

In its objection, however, Oaktree renewed its argument that the reorganization plan is nonetheless premised on a valuation that is too low.

According to Oaktree, the company’s own financial expert pegged the company’s TEV at a midpoint of roughly $1.52 billion, or $120 million more than plan value.

Oaktree said its expert valued the company at a midpoint TEV $1.992 billion, which the company said was “consistent with all indications of the debtors’ value” other than company’s aforementioned $1.52 billion valuation, which Oaktree described as an “outlier.”

Among the indications of value that Oaktree cited that were consistent with a higher valuation were a valuation of $2.022 billion used by the company in authorizing its 2016 exchange transaction, as well as “the $2.053 billion valuation implied by the percentage recovery provided to holders of general unsecured elective claims under the [reorganization] plan.”

At the higher valuation, the distribution to first-lien lenders would exceed the value of first-lien claims, Oaktree argued. Oaktree also noted that the full value of the first-lien lenders’ participation rights in the new money investment, given the low valuation and the rights offering’s below market rates and plan discounts, was not fully factored into the plan’s recovery calculations.

As for the company’s efforts to market test its valuation, Oaktree argued that the company ran “not one, but two flawed sale processes, the admitted purpose of which was to validate the low-ball valuation that underlies the [proposed reorganization] plan, rather than to obtain a value maximizing purchase offer.”

In addition, Oaktree said the marketing process “featured zero meaningful involvement from the [creditors’] committee, which was not permitted to participate in and had no role in shaping, the debtors’ communications with bidders.”

Oaktree alleged the company’s marketing “outreach was lackluster, rushed, and overseen by a conflicted finance committee with the assistance of conflicted professionals.”

Lastly, Oaktree also said that critical information was withheld from bidders during the marketing process (although the specific information withheld was redacted from the publicly-filed objection), arguing that this issue was “particularly troublesome” because the company had justified its lower plan valuation by citing the feedback from the marketing process, namely, the lack of a bid.

According to Oaktree, however, while an independent bid from the market can be evidence of enterprise value, “the absence of a bid that the debtors deem to be qualified is evidence of nothing.”

Oaktree added, “That is particularly true here where evidence will show that bidders were influenced by the compressed timing of the process, by the taint of a contentious bankruptcy, and by the perception that the debtors would resist any bid that was not favorable to Apollo and the ad hoc first lien group.”

Moving beyond its valuation claim, Oaktree charged that provisions of the company’s proposed reorganization plan providing for the $575 new money investment from first-lien lenders were neither properly vetted nor market tested.

In addition, Oaktree argued that Apollo’s participation rights in the new money investment, amounted to a recovery to equity holders greater than that for second-lien and unsecured claims in violation of the absolute priority rule.

With respect to the specific terms of the company’s proposed reorganization  plan, Oaktree charged a wide array of gerrymandering, gifting, and classification allegations that, taken as a whole, paint a picture of purported recoveries to other unsecured creditors at the expense of second-lien lenders.

For example, Oaktree expects to recover between 0.003–0.495% of its claim, compared to recoveries of 6.2% for first-lien deficiency claims, 14.6% for unsecured note claims, and 74.2% for general unsecured elective claims.

According to Oaktree, the magnitude of the difference in treatment among different flavors of unsecured claims exceed those that have previously been held to violate the Bankruptcy Code’s prohibition of discrimination within a creditor class. Oaktree further contends that the company’s rationale for these differences, the gifting of certain carve outs from the first-lien collateral, do not meet legal requirements for such gifts. — Alan Zimmerman

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Leveraged Loans: As New Issues Roll on, CLO Spreads in Europe, US Creep Higher

Europe CLO spreadsWith such a strong pipeline for collateralized loan obligations in Europe – managers expect full-year 2018 issuance to best the record €20.91 billion last year – the market could experience further indigestion, which was already witnessed pre-summer. Due to that overcrowding, CLO spreads have widened to as much as 96 bps on the AAA portion of the deals, for the last print and to an average of 92 bps in August, according to LCD.

Likewise, CLO spreads in the U.S. have risen amid issuance which also is expected to set records this year (there’s $92 billion of new vehicles so far this year, compared to $73 billion YTD 2017). Indeed, the last week of August has historically been a quiet one, allowing market participants a breather before activity picks up in the fall, but this year has been noticeably different, with a surprising 14 new issues and 10 resets/reissues pricing the last two weeks, according to LCD.

“It’s absolutely astounding how there has been no slowdown whatsoever this year,” one CLO manager said.

CLOs are special-purpose vehicles set up to hold and manage pools of leveraged loans. These vehicles are a critical investor component to the leveraged loan market, which totals some $1.1 trillion in U.S. alone, according to the S&P/LSTA Loan Index. – Isabell Witt/Andrew Park

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